FOMC interest rate decision in focus

We leave behind us a week characterised by the consistent weakening of the USD against its major counterparts, yet next week may prove more volatile. In the coming week, we have a number of interesting financial releases, but the spotlight may be on the Fed’s interest rate decision on Wednesday. Also, on the monetary front, Christine Lagarde’s speech on Monday may be of interest. Among other fundamental events of interest for the markets could be the OPEC meeting on Wednesday. Please note sources report that the OPEC+ group is set to extend its production cuts after a breakthrough with Iraq, for complying with quotas. With no time to waste, let’s have a closer look.

USD – Fed’s interest rate decision in focus

The US-Sino relationships remain tense, despite the recent easing over airlines and flights between the US and China. We expect further developments on the issue and should tensions escalate, we could see safe haven inflows for the USD. In the past week the US was rocked by protests, unrest and riots opposing police brutality. Yet the market seems to remain immune to the recent violence in the States. On the other hand, the market’s optimism about a possible recovery of the US economy seems to remain firm. It was characteristic that the USD Index continued to drop throughout the week, mirroring the safe-haven outflows suffered by the USD. Should market optimism continue to guide the markets we could see the USD retreating, albeit it should be mentioned that the bears may have overdone it. Next week on the monetary front, we focus on the release of the Fed’s interest rate decision. The bank is widely expected to maintain rates unchanged at 0.00%-0.25% and currently Feds Funds Futures (FFF) imply a probability of 99.2% for such a scenario. Please note that the market seems to price in the possibility of rates remaining unchanged until the end of the year. The accompanying statement is expected to be characterised by a supportive tone for the US economy. Also, any forward guidance about the interest rate level could affect the markets. Should there be no surprises, the main release of the event may be any possible updates of the bank’s forecasts and especially the GDP growth rate as well as unemployment and inflation. Traders and analysts may be interested in the speed at which the US economy could rebound. As for financial releases, on Wednesday, we get the US CPI rates for May, on Thursday the latest initial jobless claims figure and on Friday the preliminary University of Michigan consumer sentiment for June.

EUR – ECB’s interest rate decision in focus

The common currency tended to get substantial support from the stimulus plans announced from the EU (€750 billion) for the Eurozone and from the German government (€50-100 billion) for the German economy. Both plans have not been approved yet, hence negotiations are underway and any headlines next week about the matter, could create volatility for the common currency. EUR traders could be eyeing ECB’s interest rate decision on Thursday, especially after the recent statements by ECB officials. Characteristic of the ECB’s dovishness would be Lagarde’s comments like Europe faces “unheard of” economic crisis during peace time and that Eurozone’s GDP will likely fall 8% to 12% this year. Currently the bank is expected to maintain the refinancing rate at 0.0%, with EUROIS implying a probability of 88.0% for such a scenario to materialise. We concur with that possibility currently, yet at the same time we also expect the bank top maintain a clearly dovish tone, in line with the bank’s supportive role for Eurozone’s economy. It should be noted that the ruling of the German Constitutional court for more scrutiny in the bank’s QE program, seems to leave it unaffected in its intentions. As for financial releases, besides the final readings of the area’s PMIs for May scattered through the week, we have noted four. On Wednesday we get Germany’s employment data for May and Eurozone’s unemployment rate for April. On Thursday, we get Eurozone’s retail sales growth rate for April and on Friday Germany’s industrial orders for April.

EUR – Financial data eyed

The main event of the past week for the common currency may have been ECB’s interest rate decision. The common currency found strong support as the European Central Bank expanded its PEPP program by €600 billion, now totalling €1.35 trillion, outperforming expectations. It was characteristic that in her press conference, ECB President Christine Lagarde stated that albeit an improvement seems to be present, it still remains tepid hence action had to be taken. We expect that Christine Lagarde’s speech before the European Parliament on Monday may gain additional interest among traders and could be the main event regarding monetary policy for EUR traders. Also, in its decision yesterday the bank’s projections seem to forecast that Eurozone’s economy is to shrink by 8.7% in 2020 and rebound by 5.2% in 2021, while inflation is expected to remain well below the bank’s +2.00% yoy target, creating also substantial worries. Overall the event confirmed that the ECB remains in a “whatever it takes” modus, as the bank defends its currency. Also please note that the German government was able to seal an agreement for a fiscal stimulus of an additional €130 billion, which also created positive sentiments for the EUR. As for next week, a plethora of financial data concerning the EUR-area is to be released. We tend to concentrate on Germany’s industrial output for April and Eurozone’s more forward looking Sentix Index for June on Monday, while on Tuesday we get Germany’s trade balance for April and most importantly Eurozone’s revised GDP growth rate for Q1. Last but not least we get Eurozone’s industrial output for April on Friday.

GBP – Brexit, negative rates and GDP to trouble the pound

Brexit seems to be the main fundamental issue for the pound at the current stage. It should be noted that no progress seems to have been made in the latest round of negotiations between the UK and the EU. It was characteristic that EU’s top Brexit negotiator, Barnier stated today that the latest round of Brexit negotiations made no significant progress. Such a development could increase the pressure on Johnson’s governemnt in order to find a way out of the stalemate. A possible option for the UK government would be to ask for an extension, yet up until now it remained adamant that the end of the year remains the deadline with or with out a deal. It would be characteristic of the situation, that BoE governor Andrew Bailey increased pressure on banks to step up no Brexit deal preparations, creating substantial worries among pound traders. Analysts tend to warn that such a scenario may force BoE to employ negative rates. It’s characteristic that BoE was allready examining such a scenario, under the pressure of the financial crisis. A possible hard Brexit would increase such probabilities substantially. Also the BoE stated last month that the U.K. output could decline by 14% this year and we add that a hard Brexit could deepen the contraction and dampen the recovery. As for financial releases, we tend to note on Wednesday the release of the GDP rates, manufacturing output growth rates and the trade balance figure, all for April.

JPY – Safe haven flows to be the main driver

JPY tended to experience substantial safe haven outflows in the past week, as investors eyed a possible economic recovery in the US and other parts of the world. Characteristically, JPY weakened substantially against the USD over the past week, even though the greenback retreated against many of its counterparts. We expect that the Japanese currency is to continue to be influenced by safe-haven flows in the coming week. It should be noted that BoJ officials had stated in the past few days that no plans existed to buy municipal bonds dampening hopes for a recovery among JPY traders. BoJ’s next meeting is on the 16th of June and as we near the date headlines about statements made by BoJ officials may increase. As for financial releases, JPY traders are expected to focus on Monday, as we get Japan’s revised GDP rate for Q1, while at the same time we also get the current account balance. Also, on Wednesday, we get the corporate goods prices for May as well as Japan’s machinery orders growth rate for April.

AUD – Riding the wave of optimism

The Aussie continued to rally against the USD in the past days as investors tended to favour the commodity currency. Expectations for a recovery of the global economy tended to increase demand for the Aussie despite adverse financial data underscoring the damage done to Australia’s economy by the lockdown measures. The rise was so strong that some analysts tended to note that RBA may be uncomfortable by the appreciation of AUD, as it would make Australian exports more expensive. For the time being we consider this scenario as quite remote. It should be noted that the bank in its latest meeting on Tuesday remained on hold at +0.25%. The bank’s accommodative approach is expected to be maintained for as long as it is required. A slight optimism seemed to be present as the bank stated that it is possible that the depth of the downturn will be less than earlier expected. As for financial releases, we could see Aussie traders focusing on the release of China’s trade balance on Sunday as well as China’s inflation rates on Wednesday, both for May, as the two countries have very close economic ties, with Australian exports of raw material being substantial. From Australia we get the business confidence indicator for May on Tuesday as well as the consumer sentiment for June on Wednesday.

General Comment

As a general comment, we expect in the next week the USD to maintain the initiative, regardless of direction. An exception could be the pound, which may be more influenced by any Brexit developments. The outlook for the GBP does not seem all that good and we tend to maintain worries, albeit it should be mentioned that the sterling had considerable gains against the USD in the past days. Should market sentiment continue to be characterised by optimism and generally be more risk on oriented, we may continue to see the USD weakening and commodity currencies strengthening. In such a scenario we may see JPY suffering more safe-haven outflows than the USD. At the same time, we would like to highlight once again the Fed’s interest rate decision as the main event of the week.

책임 고지:

본 자료는 투자 권유가 아니며 정보 전달의 목적이므로 참조만 하시기 바랍니다. IronFX는 본 자료 내에서 제 3자가 이용하거나 링크를 연결한 데이터 또는 정보에 대해 책임이 없습니다.

공유: